Merger Activity Generates Run-Up in Stocks of Banks
The joke around Wall Street is that investors have been snapping up shares of just about any company with a teller’s window and a ticker symbol.
The stampede to buy banking stocks followed the recent wave of megamergers within the industry.
Takeovers of Security Pacific by BankAmerica, Manufacturers Hanover by Chemical and C&S-Sovran; by NCNB are just the start of what most bank experts believe will be an intense and much-needed consolidation over the next few years.
Actually, it’s been going on for some time, particularly among savings and loans and smaller bank institutions. But the latest spate of well-publicized deals has many guessing about which of the nation’s 12,000 bank holding companies will be next.
“You can play with all sorts of scenarios. My crystal ball gets real hazy after a year or two,” said Richard Levine, a senior bank analyst for Standard & Poor’s Corp. “One thing is for certain: All of these anticipated mergers aren’t going to happen today or tomorrow.”
While most analysts are generally bullish on banking stocks these days, they caution against choosing shares solely on the anticipation of a merger, saying the risk of investing in the wrong company is too great.
“If you’re just buying in anticipation of a merger, you can get burned,” said Levine.
Dennis Shea, a vice president at Morgan Stanley & Co., says a survey he conducted in 1989 confirmed that. He followed a group of 30 banks rumored as possible takeover targets two to three years previously. He found that if you bought and held them all, you’d end up on the losing end. “You had some real big winners and a lot of real big losers,” he said.
Shea suggested “finding banks with good fundamentals . . . good capital, good liquidity, reasonably good credit quality.
“If they get acquired or acquire someone later, that’s just an added bonus.”
Yet Wall Street hasn’t been too choosy about picking banking stocks, which have dominated the New York Stock Exchanges most-active-trading lists.
Troubled giants like Citicorp and Chase Manhattan shot up, surprising some analysts, along with banks like Security Pacific, BankAmerica, NCNB, C&S-Sovran; and Chemical. First Interstate and Wells Fargo, rumored to be the next merger pair, were among the many others to also rise in price.
One analyst joked that if scandal-ridden Bank of Credit & Commerce International had a stock, it might have risen too.
Analysts say there are plenty of good performers from which to choose. Over the past several months the entire sector has outperformed the market, a reflection of restructurings and steady improvement in many banks’ loan portfolios, liquidity and capital.
Shea says the Morgan Stanley Bank index of around 30 banks was up 85% in value from the end of October through early August, while the S&P; 500 index rose 27%. From October, 1989, to October, 1990, the bank index had fallen about 60%, when many stocks traded down to historical lows.
Among the long list of “buy” recommendations from some analysts are many so-called super-regionals: Bank of New York ($33.375 Friday, NYSE); Banc One of Columbus, Ohio ($45.25, NYSE); National City Bank of Cleveland ($39.75, NYSE); SunTrust of Atlanta ($33, NYSE); Wachovia of Winston-Salem, N.C. ($56.50, NYSE); KeyCorp. of Albany, N.Y. ($40, NYSE); and Norwest of Minneapolis ($32.625, NYSE). BankAmerica ($41.875, NYSE) and NCNB ($37.375, NYSE) also made the list.
Most of these banks have what it takes to survive and expand, analysts say. Sandra Flannigan, a principal at Alex. Brown & Sons in Baltimore, says she prefers owning stock of potential acquirers rather than target companies since those “have banks” are strong and have the means to take advantage of a merger.
Strength in size and streamlined operations--byproducts of bank combinations--have become critical in today’s marketplace as banks, hurt by the recession and bad loans, recover from their worst financial crisis since the Great Depression.
The survival of many seems to depend on finding partners with which to merge and eliminating duplications in staff, services and branches.
BankAmerica, for instance, says it expects to cut about $1 billion in annual expenses three years after its $4.5-billion West Coast merger with Security Pacific.
“Consolidation is a powerful theme that will continue to play out,” said Shea. “It’s positive for the industry.”
